Will states find other revenue streams to weather the fossil fuel bust?

Powerhouses like Wyoming and Alaska are shrinking budgets, not looking for new sources of income.

From Cheyenne to Juneau and Bismarck to Santa Fe, several Western states are scrambling to tailor their budgets to harsh new economic realities. Gaping deficits wrought by tumbling fossil fuel revenue are forcing states like Alaska and Wyoming to slash spending, but little is being done – at least for now – to address politically unpopular, longer-term questions about new revenue models that would lessen their dependence on boom-and-bust industries.

This year severance tax revenue in Wyoming is projected to fall to about 70 percent of 2014 levels. In Alaska, a more-than $4 billion deficit has set in, just three years after a $13 billion budget surplus.

While policymakers have cut expenditures and considered modest tax increases on some goods and services, changes like those can’t fill the void, says Brian Sigritz of the National Association of State Budget Officers.

“A lot of times if you’re looking to substantially increase revenue, it has to be some of the more broad-based taxes,” says Sigritz, referencing sales and income taxes.

Coal's importance to the local economy is reflected by a sign arcing above Rock Springs, Wyoming. Lost government revenue from coal and other fossil fuels has led to strict budget cuts in the state, but not new taxes.

But those major changes – such as implementing an income tax, which doesn’t exist in either state – remain politically unfavorable. For now, just like in past dry spells, the strategy of choice is to simply scale back spending and wait it out.

“There’s a real kind of austerity in the state,” says Rob Godby, chair of the University of Wyoming’s Department of Economics. “The reaction in that situation is really just, ‘Tighten your belt.’”

He says the state has developed budgetary habits that mirror the boom-and-bust cycles of its economy: Spend when times are good and scrimp when times are tough. For example, the state generally tries to avoid program spending extended across several years, and instead makes efforts to lump investments in one-time payment surges when it can afford them.

True to form, Godby says the state’s recent legislative session was “all about cost cutting” and drawing down limited savings, not different revenue models. Talk of introducing an income tax “is heresy out here,” Godby says, but he suspects the next legislative session may need to broach the subject of new revenue sources.

The debate isn’t new. The state was prompted to weigh alternative tax structures when oil faltered back in the ‘90s. “Income tax was a serious consideration,” Godby says. “They recognized this was completely unsustainable.” But the state was spared any tough decisions by an unforeseen windfall from unconventional natural gas sources in the early 2000s. Since then, oil, coal and natural gas have been cornerstones of the economy and tax base, making Wyoming susceptible to a "triple-whammy" as markets for all three have taken a hit.

In past downturns, Alaska has been in the same boat, emphasizing cuts and use of savings instead of new funding. But this time the state is forced to consider a different approach because the decline in revenue is so extreme. “We can’t cut our way out of the problem,” says Gunnar Knapp, an economist at the University of Alaska Anchorage.

Gov. Bill Walker has indicated that he will call a special legislative session as lawmakers try to develop financial solutions to the oil-induced crisis. When it comes to generating revenue, Alaska has some unique options on the table. It is the only state with neither a sales tax nor income tax, and also distributes hefty payments to citizens each year from the Alaska Permanent Fund – a restricted fund that invests more than $50 billion in saved oil and mineral revenue, with earnings from interest being shelled out to state residents. The payout, known as the Permanent Fund Dividend, exceeded $2,000 per person last year.

While an income tax is now being talked about, the prospect of new taxes remains unpopular in public and in the statehouse. That has shifted much of the conversation to the Permanent Fund – long considered a sacred cow.

“The Permanent Fund until this time has been politically untouchable,” says Knapp. “Now there’s discussion about reducing the dividends and reducing the amount we save…. It’s being viewed here as an earth-shakingly big deal.”

Though usually considered more palatable, even a sales tax would be complicated in Alaska. A number of towns and cities have imposed local sales taxes, but in remote villages, where groceries and other flown-in necessities can have exorbitant costs, a sales tax would further distort prices.

Instead, Knapp says policymakers are considering minor tax increases on things like motor fuel and alcohol and a planned tax on newly legalized marijuana that would collect a relatively small amount.

But there may be no lasting fix for Alaska and Wyoming unless broad-based, unpopular taxes are introduced to help diversify revenue. For years, Alaska’s oil production has been on a downward trend, and Wyoming coal output has fallen steadily this decade. Those declines raise troubling questions about the road ahead.

“So what do we look like in 15 years? Nobody’s figured that out,” Knapp says. He says tourism, fishing and mining can play important roles in a new Alaskan economy as oil revenue tapers off, but won't be able to produce a windfall of the same caliber.

Unless things get really bad, Godby says, addressing looming questions about an overdependence on resource extraction is unlikely to occur in times of trouble.

“To move away from the boom-and-bust cycle would require a structural move,” says Godby. “That’s a really heavy lift. It’s not something you can do in a crisis.”